Forget the Bayonets

Consider Huntington Ingalls and General Dynamics as plays on a 'Romney Navy.'

Though Mitt Romney narrowly lost last night's final presidential debate (per a CNN snap poll), he passed the commander-in-chief test. Though we'll stick for now to our prediction of an excruciatingly close Obama victory, pending further measurement of Romney's post-surge results in Ohio and other Midwestern swing states, a loss by the president seems more viable by the day.

CNN's survey of registered voters after last night's third and final presidential debate found a narrow (48%-40%) Obama victory. A slim majority also saw the president as the stronger leader (51%-46%). Nevertheless, the poll found that a slightly higher number changed their minds in favor of supporting Romney (25%) than Obama (24%), with 50% unmoved. While 63% said Obama was capable of handling the responsibilities of being commander-in-chief, 60% said the same thing about Romney.

The reported win for Obama -- his second in a row-- was welcomed by Democratic supporters, who probably sighed in relief when Romney opened up by essentially standing down in his earlier criticisms of the administration's handling of the recent 9/11 Benghazi terrorist attacks that killed the U.S. Ambassador to Libya. But it may not have been big enough to calm fears that Romney's bounce after the president's disastrous performance in the first debate in Denver was more a "surge" that has yet to run its course.

Indeed, the biggest takeaway may have been that Romney clearly passed the test as a suitable commander in chief, as the CNN numbers and post-debate analysis from pundits seemed to support.

Meanwhile, Romney's strategy of taking a non-confrontational tone may have ceded victory to Obama (who once again was seen by more observers as exceeding expectations) -- but could turn out to have been a smart one, nonetheless. Specifically, Romney may have elected to avoid coming off as a warmonger, and not to alienate female voters, with whom he has recently closed a gender gap.

By contrast, the president's remedial work towards projecting aggressiveness may have backfired, most notably in his flip response to a Romney attack line suggesting that the Navy is smaller now that at any time since 1917, and that it would shrink much further under budget sequestration that could occur in the absence of a Hill agreement before January 1.

Obama's retort:

"I think Governor Romney maybe hasn't spent enough time looking at how our military works. You mentioned the Navy, for example, and that we have fewer ships than we did in 1916. Well, Governor, we also have fewer horses and bayonets, because the nature of our military's changed. We have these things called aircraft carriers, where planes land on them. We have these ships that go underwater, nuclear submarines.

"And so the question is not a game of Battleship, where we're counting slips. It's what are our capabilities. And so when I sit down with the Secretary of the Navy and the Joint Chiefs of Staff, we determine how are we going to be best able to meet all of our defense needs in a way that also keeps faith with our troops, that also makes sure that our veterans have the kind of support that they need when they come home.

"And that is not reflected in the kind of budget that you're putting forward because it just doesn't work."

The only problem with Obama's seemingly smug response: He was contradicting the public testimony of his own defense secretary, Leon Panetta, as Arizona senator and 2008 Republican presidential candidate John McCain subsequently pointed out on Fox News.

The result could prove tailor-made for campaign ads to be run in the already-reddening and defense-dependent states of Virginia and Florida.

Meanwhile, by contrast, it was hardly clear that Romney helped himself in the potentially decisive state of Ohio with his latest defense of his earlier position against an auto bailout.

This may leave the race right where it was, with either Romney continuing to surge toward victory by picking up Ohio, Iowa or Wisconsin, or Obama holding him off in the Midwest to win narrow reelection. Awaiting further evidence in individual battleground state polls, my Capital Alpha colleagues and I will retain a while longer our 55% odds of an Obama re-elect and Democratic senate.

Nevertheless, we believe Romney helped himself by reprising and putting a national security dimension on his five-point plan to rebuild the U.S. economy. We also mimic the observations of NBC's Chuck Todd, who noted that "Obama seemed the one playing as though behind." With the debates now over, the two sides roughly equal in cash on hand, and Americans seemingly now less persuadable via negative campaign ads, it's hard to see what might emerge to shake the race from its present course here on in.

In essence, Romney is looking more and more like a potential winner. And Obama's loss seems more viable by the day.

Meanwhile, of all the CAP "Red Stock" suggestions, none would seem more suitable to highlight after last night than Byron Callan's citing of Huntington Ingalls and General Dynamics as pure plays on a bigger "Romney Navy."

As Byron has noted, acting on the advice of his principal defense advisor and Reagan-era Navy Secretary John Lehman, Romney has proposed to substantially raise the shipbuilding rate -- a sweet spot for HII and GD in particular. Meanwhile, though Obama said emphatically last night that a defense budget sequester "will not happen" on January 1, his advisors have telegraphed the president's intention to leverage exactly that as a means to forcing tax-related concessions from Republicans during the lame duck session of Congress. Along with Romney's likely unaffordable pledge to maintain defense spending at 4% of GDP, the net makes the defense group as red for this cycle as it has arguably been since the Bush vs. Gore contest in 2000.

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At the time of publication, Gabriel had no positions in the stocks mentioned.

GE shares initially were down after releasing its outlook but regained that lost ground before the open.

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